Chancellor Philip Hammond delivered the UK Autumn Budget on 29 October 2018, buoyed by a higher than expected GDP forecast of 1.6% in 2019, and a need to manage the ongoing effects of the departure from the EU. The message of the budget is that it represents the era of austerity “finally coming to an end” - and the Chancellor has introduced a range of taxpayer-friendly measures to reflect that sentiment.
To help you and your business get to grips with the 2018 budget, and its economic consequences, we’ve put together a list of key points…
Income Tax & Wages
The budget includes a range of measures favourable to individual taxpayers - a group Hammond refers to as “the strivers, the grafters, and the carers”.
- Personal Allowance: The tax free personal income tax allowance has been increased to £12,500 (from £11,850). The new threshold will take effect from April 2019 - a year earlier than planned.
- Consumer Price Index: From tax year 2021-22, the Personal Allowance for income tax will be indexed with the Consumer Price Index.
- Higher Rate: From April 2019, the threshold for higher rate income tax (40%) will rise from £46,350 to £50,000 - representing a reduction of around 1 million taxpayers who will be higher rate taxpayers in comparison to 2015-16.
- National Living Wage: From April 2019, the National Living Wage will increase to £8.21 per hour (from £7.83) - translating to an annual pay rise of £690 for full-time workers, and an estimated net benefit for 2.4 million workers.
Since income tax rates are different in Scotland, the Scottish government will set out its own income tax plan in the Scottish Parliament on 12 December 2018.
The 2018 budget will, from 2020-21, limit access to the Employment Allowance (EA) for those businesses making employer National Insurance contributions of less than £100,000. EA will continue to be available for around 93% of employers, and effectively offer these businesses and charity organisations significant savings of up to £3,000 each year.
The budget contains positive and negative measures for businesses across the industrial landscape - but puts an emphasis on kick-starting small business growth.
- Digital Services Tax: From April 2020, a 2% Digital Services tax (DST) will be introduced for large digital firms (such as Netflix, Amazon, Apple and Facebook) with global sales of over £500m. The landmark tax is designed to address the “fairness of the tax system”, and is projected to raise around £400m each year. DST may be rescinded if the OECD introduces its own international ‘digital services’ tax formula.
- Private Finance Initiative: After 30 years of funding a variety of projects PFI will be discontinued. The government will continue to honour existing PFI contracts and will introduce a “centre of excellence” to manage existing projects in the public interest.
- Annual Investment Allowance: From 1 January 2019, the tax free Annual Investment Allowance for businesses will increase to £1 million (from £200,000) - a measure to stimulate business growth.
- Apprenticeship Levy: From April 2019, small businesses will see their apprenticeship levy reduced to 5% (from 10%) - with the government covering the remaining 95%. Similarly, large businesses will be able to support apprentices by investing a maximum of 25% of their apprenticeship levy.
- Business Rates: Small retail businesses (with a rateable value of up to £51,000) will have their business rates reduced by two thirds for a period of two years, effective from April 2019. The measure amounts to around £900 million of relief, and is projected to benefit 90% of independent retailers, pubs, and restaurants, with savings of up to £8,000. Public toilets will receive 100% business rate relief.
- High Street Businesses: The budget also announced an allocation of £675 million to rejuvenate high street businesses by improving transport infrastructure, developing empty units, and restoring older properties.
- VAT Registration: The threshold for VAT registration will remain frozen at £85,000 until April 2022.
Health and Education
With a supposed end to austerity, comes an expected financial benefit for education and healthcare services. To that end, the chancellor has introduced a number of measures:
- NHS Funding: The budget increases NHS funding by £20.5 billion by 2023-24. Of that amount, local councils will receive £700m to care for the elderly and disabled, and £10m will be apportioned to air ambulances.
- Mental Health: Within the NHS funding increase, will be £2 billion dedicated to mental health care, including the introduction of mental health crisis centres in A&E units, a 24-hour mental health hotline, and mental health ambulances.
- Schools and Universities: Schools will receive a one-off £400 million funding ‘bonus’ to help with “the little extras they need” - translating to around £10,000 per primary school, and £50,000 per secondary school. Funding will also be introduced for 10 “University Enterprise Zones”.
National and Regional Funding
Money has also been allocated to the various devolved governments of the UK, and certain special regional projects, including:
- Additional Funding: In the region of £950m for the Scottish government, £550m for the Welsh government, and £320m for the Northern Ireland Executive in the 2020-21 tax year.
- New City and Growth Deals: Special funding initiatives for Scotland’s Tay Cities (Dundee, Perth, Angus, and northern Fife), northern Wales, and Belfast (which will also receive £2m to help with recovery from the recent Primark fire).
- Defence and National Rehabilitation Centre: £70m in funding for the world-leading rehab centre.
Corporation Tax: Permanent Establishment Rules
In a measure impacting international businesses with UK operations (and especially non-resident manufacturers and distributors), the 2018 budget changes the definition of ‘permanent establishment’, with consequences for those entities’ tax-residency status.
Under the new rules, which come into effect from 1 January 2019, businesses with certain low-value preparatory and auxiliary activities in the UK, such as storage, purchasing, or data collection facilities, will now be classed as having a permanent establishment and will be liable for UK corporation tax. The measure aims to prevent businesses avoiding tax by splitting their activities across multiple locations and companies.
Capital Gains Tax: Entrepreneurs’ Relief
The 2018 budget increases the minimum qualifying period for Entrepreneurs’ Relief - from 12 months to 2 years. The longer-term qualification period is intended to encourage true entrepreneurial interest and activity - as opposed to investment and speculation - and reflects the government’s ongoing policy of supporting enterprise.
Van and Fuel Benefit
From 6 April 2019, the van benefit charge will be increased by the Consumer Price Index - taking it to £3,430. Similarly, fuel benefit charges for cars and vans will be increased by the Retail Price index - to £24,100 and £655, respectively.
Electric Vehicles: Charging Points FYA
To further support the use of electric vehicles, the 2018 budget extends the current 100% first year allowance for electric charge points. Specifically, the FYA has been extended to 31 March 2023 for corporate taxpayers, and 5 April 2023 for income taxpayers.
Fuel, Alcohol & Tobacco Duties
The budget includes several measures which affect duties:
- Fuel duty has been frozen for a ninth successive year.
- Wine duty will increase with RPI, but duty on beer, cider, and most spirits has been frozen.
- Tobacco duty has been increased by 2% above RPI.
Rule IR35: Employee Classification
From April 2020 rule IR35, concerning the taxation of contractors, will be extended from the public sector to large and medium-size businesses in the private sector. Under the rules, employers will need to be more stringent about the classification of certain employees - specifically, the status of contractors - and how payroll treats them for tax purposes.
The measure is designed to help the exchequer recover around £1.3bn a year in lost tax revenue. While concerns have been raised, the government has insisted genuinely self-employed workers will not be adversely affected, and the rule will not apply to the UK’s 1.5 million smallest businesses.
Gift Aid Small Donations Scheme
In April 2019, the limit on the Gift Aid Small Donations Scheme will be increased to £30 (from £20), bringing it in line with the limit on normal contactless card payments - and allowing small donations of up to £30 to be made by contactless payment.
The 2018 budget allocates an extra £500m to government departments in preparation for Brexit and the potential fallout from a “No Deal” exit negotiation. The chancellor has hinted at a “double deal dividend” if negotiations are concluded positively: the result of the increased certainty produced by a positive resolution, and from the “fiscal headroom” being held in reserve.
For more insight into the UK’s tax, payroll and business landscape, browse activpayroll’s UK Global Insight Guide.